IAS 26

International Accounting Standard 26

Accounting and Reporting by Retirement

Benefit Plans
In April 2001 the International Accounting Standards Board (IASB) adopted IAS 26
Accounting and Reporting by Retirement Benefit Plans, which had originally been issued by the
International Accounting Standards Committee in January 1987.

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CONTENTS

from paragraph

INTERNATIONAL ACCOUNTING STANDARD 26

ACCOUNTING AND REPORTING BY RETIREMENT BENEFIT PLANS
SCOPE

DEFINITIONS

DEFINED CONTRIBUTION PLANS

13

DEFINED BENEFIT PLANS

17

Actuarial present value of promised retirement benefits

23

Frequency of actuarial valuations

27

Financial statement content

28

ALL PLANS

32

Valuation of plan assets

32

Disclosure

34

EFFECTIVE DATE

37

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International Accounting Standard 26 Accounting and Reporting by Retirement Benefit Plans

(IAS 26) is set out in paragraphs 137. All the paragraphs have equal authority but
retain the IASC format of the Standard when it was adopted by the IASB. IAS 26 should
be read in the context of the Preface to International Financial Reporting Standards and the
Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors provides a basis for selecting and applying accounting policies in the
absence of explicit guidance.

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International Accounting Standard 26

Accounting and Reporting by Retirement Benefit Plans
Scope
1

This Standard shall be applied in the financial statements of retirement benefit

plans where such financial statements are prepared.

Retirement benefit plans are sometimes referred to by various other names, such
as pension schemes, superannuation schemes or retirement benefit schemes.
This Standard regards a retirement benefit plan as a reporting entity separate
from the employers of the participants in the plan. All other Standards apply to
the financial statements of retirement benefit plans to the extent that they are not
superseded by this Standard.

This Standard deals with accounting and reporting by the plan to all participants
as a group. It does not deal with reports to individual participants about their
retirement benefit rights.

IAS 19 Employee Benefits is concerned with the determination of the cost of

retirement benefits in the financial statements of employers having plans. Hence
this Standard complements IAS 19.

Retirement benefit plans may be defined contribution plans or defined benefit

plans. Many require the creation of separate funds, which may or may not have
separate legal identity and may or may not have trustees, to which contributions
are made and from which retirement benefits are paid. This Standard applies
regardless of whether such a fund is created and regardless of whether there are
trustees.

Retirement benefit plans with assets invested with insurance companies are
subject to the same accounting and funding requirements as privately invested
arrangements. Accordingly, they are within the scope of this Standard unless the
contract with the insurance company is in the name of a specified participant or
a group of participants and the retirement benefit obligation is solely the
responsibility of the insurance company.

This Standard does not deal with other forms of employment benefits such as
employment termination indemnities, deferred compensation arrangements,
long-service leave benefits, special early retirement or redundancy plans, health
and welfare plans or bonus plans. Government social security type arrangements
are also excluded from the scope of this Standard.

Definitions
8

The following terms are used in this Standard with the meanings specified:

Retirement benefit plans are arrangements whereby an entity provides benefits for
employees on or after termination of service (either in the form of an annual
income or as a lump sum) when such benefits, or the contributions towards them,
can be determined or estimated in advance of retirement from the provisions of a
document or from the entitys practices.

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Defined contribution plans are retirement benefit plans under which amounts to be
paid as retirement benefits are determined by contributions to a fund together
with investment earnings thereon.
Defined benefit plans are retirement benefit plans under which amounts to be paid
as retirement benefits are determined by reference to a formula usually based on
employees earnings and/or years of service.
Funding is the transfer of assets to an entity (the fund) separate from the employers
entity to meet future obligations for the payment of retirement benefits.
For the purposes of this Standard the following terms are also used:

Participants are the members of a retirement benefit plan and others who are
entitled to benefits under the plan.
Net assets available for benefits are the assets of a plan less liabilities other than the
actuarial present value of promised retirement benefits.
Actuarial present value of promised retirement benefits is the present value of the
expected payments by a retirement benefit plan to existing and past employees,
attributable to the service already rendered.
Vested benefits are benefits, the rights to which, under the conditions of a
retirement benefit plan, are not conditional on continued employment.
9

Some retirement benefit plans have sponsors other than employers; this Standard
also applies to the financial statements of such plans.

10

Most retirement benefit plans are based on formal agreements. Some plans are
informal but have acquired a degree of obligation as a result of employers
established practices. While some plans permit employers to limit their
obligations under the plans, it is usually difficult for an employer to cancel a plan
if employees are to be retained. The same basis of accounting and reporting
applies to an informal plan as to a formal plan.

11

Many retirement benefit plans provide for the establishment of separate funds
into which contributions are made and out of which benefits are paid. Such
funds may be administered by parties who act independently in managing fund
assets. Those parties are called trustees in some countries. The term trustee is
used in this Standard to describe such parties regardless of whether a trust has
been formed.

12

Retirement benefit plans are normally described as either defined contribution

plans or defined benefit plans, each having their own distinctive characteristics.
Occasionally plans exist that contain characteristics of both. Such hybrid plans are
considered to be defined benefit plans for the purposes of this Standard.

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Defined contribution plans

13

The financial statements of a defined contribution plan shall contain a statement

of net assets available for benefits and a description of the funding policy.

14

Under a defined contribution plan, the amount of a participants future benefits

is determined by the contributions paid by the employer, the participant, or both,
and the operating efficiency and investment earnings of the fund. An employers
obligation is usually discharged by contributions to the fund. An actuarys advice
is not normally required although such advice is sometimes used to estimate
future benefits that may be achievable based on present contributions and varying
levels of future contributions and investment earnings.

15

The participants are interested in the activities of the plan because they directly
affect the level of their future benefits. Participants are interested in knowing
whether contributions have been received and proper control has been exercised
to protect the rights of beneficiaries. An employer is interested in the efficient and
fair operation of the plan.

16

The objective of reporting by a defined contribution plan is periodically to

provide information about the plan and the performance of its investments.
That objective is usually achieved by providing financial statements including
the following:
(a)

a description of significant activities for the period and the effect of any
changes relating to the plan, and its membership and terms and conditions;

(b)

statements reporting on the transactions and investment performance for

the period and the financial position of the plan at the end of the period;
and

(c)

a description of the investment policies.

Defined benefit plans

17

The financial statements of a defined benefit plan shall contain either:

(a)

(b)

a statement that shows:

(i)

the net assets available for benefits;

(ii)

the actuarial present value of promised retirement benefits,

distinguishing between vested benefits and non-vested benefits; and

(iii)

the resulting excess or deficit; or

a statement of net assets available for benefits including either:

(i)

a note disclosing the actuarial present value of promised retirement

benefits, distinguishing between vested benefits and non-vested benefits;
or

(ii)

a reference to this information in an accompanying actuarial report.

If an actuarial valuation has not been prepared at the date of the financial
statements, the most recent valuation shall be used as a base and the date of the
valuation disclosed.

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18

For the purposes of paragraph 17, the actuarial present value of promised
retirement benefits shall be based on the benefits promised under the terms of the
plan on service rendered to date using either current salary levels or projected
salary levels with disclosure of the basis used. The effect of any changes in
actuarial assumptions that have had a significant effect on the actuarial present
value of promised retirement benefits shall also be disclosed.

19

The financial statements shall explain the relationship between the actuarial
present value of promised retirement benefits and the net assets available for
benefits, and the policy for the funding of promised benefits.

20

Under a defined benefit plan, the payment of promised retirement benefits

depends on the financial position of the plan and the ability of contributors to
make future contributions to the plan as well as the investment performance and
operating efficiency of the plan.

21

A defined benefit plan needs the periodic advice of an actuary to assess the
financial condition of the plan, review the assumptions and recommend future
contribution levels.

22

The objective of reporting by a defined benefit plan is periodically to provide

information about the financial resources and activities of the plan that is useful
in assessing the relationships between the accumulation of resources and plan
benefits over time. This objective is usually achieved by providing financial
statements including the following:
(a)

a description of significant activities for the period and the effect of any
changes relating to the plan, and its membership and terms and conditions;

(b)

statements reporting on the transactions and investment performance for

the period and the financial position of the plan at the end of the period;

(c)

actuarial information either as part of the statements or by way of a

separate report; and

(d)

a description of the investment policies.

Actuarial present value of promised retirement benefits

23

The present value of the expected payments by a retirement benefit plan may be
calculated and reported using current salary levels or projected salary levels up to
the time of retirement of participants.

24

The reasons given for adopting a current salary approach include:

(a)

the actuarial present value of promised retirement benefits, being the sum
of the amounts presently attributable to each participant in the plan, can be
calculated more objectively than with projected salary levels because it
involves fewer assumptions;

(b)

increases in benefits attributable to a salary increase become an obligation

of the plan at the time of the salary increase; and

(c)

the amount of the actuarial present value of promised retirement benefits

using current salary levels is generally more closely related to the amount
payable in the event of termination or discontinuance of the plan.

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25

26

Reasons given for adopting a projected salary approach include:

(a)

financial information should be prepared on a going concern basis,

irrespective of the assumptions and estimates that must be made;

(b)

under final pay plans, benefits are determined by reference to salaries at or

near retirement date; hence salaries, contribution levels and rates of return
must be projected; and

(c)

failure to incorporate salary projections, when most funding is based on

salary projections, may result in the reporting of an apparent overfunding
when the plan is not overfunded, or in reporting adequate funding when
the plan is underfunded.

The actuarial present value of promised retirement benefits based on current

salaries is disclosed in the financial statements of a plan to indicate the obligation
for benefits earned to the date of the financial statements. The actuarial present
value of promised retirement benefits based on projected salaries is disclosed to
indicate the magnitude of the potential obligation on a going concern basis which
is generally the basis for funding. In addition to disclosure of the actuarial present
value of promised retirement benefits, sufficient explanation may need to be
given so as to indicate clearly the context in which the actuarial present value of
promised retirement benefits should be read. Such explanation may be in the
form of information about the adequacy of the planned future funding and of
the funding policy based on salary projections. This may be included in the
financial statements or in the actuarys report.

Frequency of actuarial valuations

27

In many countries, actuarial valuations are not obtained more frequently than
every three years. If an actuarial valuation has not been prepared at the date of the
financial statements, the most recent valuation is used as a base and the date of
the valuation disclosed.

Financial statement content

28

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For defined benefit plans, information is presented in one of the following formats
which reflect different practices in the disclosure and presentation of actuarial
information:
(a)

a statement is included in the financial statements that shows the net assets
available for benefits, the actuarial present value of promised retirement
benefits, and the resulting excess or deficit. The financial statements of the
plan also contain statements of changes in net assets available for benefits
and changes in the actuarial present value of promised retirement
benefits. The financial statements may be accompanied by a separate
actuarys report supporting the actuarial present value of promised
retirement benefits;

(b)

financial statements that include a statement of net assets available for

benefits and a statement of changes in net assets available for benefits.
The actuarial present value of promised retirement benefits is disclosed in a

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note to the statements. The financial statements may also be accompanied

by a report from an actuary supporting the actuarial present value of
promised retirement benefits; and
(c)

financial statements that include a statement of net assets available for

benefits and a statement of changes in net assets available for benefits with
the actuarial present value of promised retirement benefits contained in a
separate actuarial report.

In each format a trustees report in the nature of a management or directors

report and an investment report may also accompany the financial statements.
29

Those in favour of the formats described in paragraph 28(a) and (b) believe that the
quantification of promised retirement benefits and other information provided
under those approaches help users to assess the current status of the plan and the
likelihood of the plans obligations being met. They also believe that financial
statements should be complete in themselves and not rely on accompanying
statements. However, some believe that the format described in paragraph 28(a)
could give the impression that a liability exists, whereas the actuarial present
value of promised retirement benefits does not in their opinion have all the
characteristics of a liability.

30

Those who favour the format described in paragraph 28(c) believe that the
actuarial present value of promised retirement benefits should not be included
in a statement of net assets available for benefits as in the format described in
paragraph 28(a) or even be disclosed in a note as in paragraph 28(b), because it will
be compared directly with plan assets and such a comparison may not be valid.
They contend that actuaries do not necessarily compare actuarial present value of
promised retirement benefits with market values of investments but may instead
assess the present value of cash flows expected from the investments. Therefore,
those in favour of this format believe that such a comparison is unlikely to reflect
the actuarys overall assessment of the plan and that it may be misunderstood.
Also, some believe that, regardless of whether quantified, the information about
promised retirement benefits should be contained solely in the separate actuarial
report where a proper explanation can be provided.

31

This Standard accepts the views in favour of permitting disclosure of the

information concerning promised retirement benefits in a separate actuarial
report. It rejects arguments against the quantification of the actuarial present
value of promised retirement benefits. Accordingly, the formats described in
paragraph 28(a) and (b) are considered acceptable under this Standard, as is the
format described in paragraph 28(c) so long as the financial statements contain a
reference to, and are accompanied by, an actuarial report that includes the
actuarial present value of promised retirement benefits.

All plans
Valuation of plan assets
32

Retirement benefit plan investments shall be carried at fair value. In the case of
marketable securities fair value is market value. Where plan investments are held
for which an estimate of fair value is not possible disclosure shall be made of the
reason why fair value is not used.

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33

In the case of marketable securities fair value is usually market value because
this is considered the most useful measure of the securities at the report date
and of the investment performance for the period. Those securities that have a
fixed redemption value and that have been acquired to match the obligations of
the plan, or specific parts thereof, may be carried at amounts based on their
ultimate redemption value assuming a constant rate of return to maturity.
Where plan investments are held for which an estimate of fair value is not
possible, such as total ownership of an entity, disclosure is made of the reason
why fair value is not used. To the extent that investments are carried at amounts
other than market value or fair value, fair value is generally also disclosed.
Assets used in the operations of the fund are accounted for in accordance with
the applicable Standards.

Disclosure
34

35

The financial statements of a retirement benefit plan, whether defined benefit or

defined contribution, shall also contain the following information:
(a)

a statement of changes in net assets available for benefits;

(b)

a summary of significant accounting policies; and

(c)

a description of the plan and the effect of any changes in the plan during
the period.

Financial statements provided by retirement benefit plans include the following,

if applicable:
(a)

(b)

a statement of net assets available for benefits disclosing:

(i)

assets at the end of the period suitably classified;

(ii)

the basis of valuation of assets;

(iii)

details of any single investment exceeding either 5% of the net assets

available for benefits or 5% of any class or type of security;

(iv)

details of any investment in the employer; and

(v)

liabilities other than the actuarial present value of promised

retirement benefits;

a statement of changes in net assets available for benefits showing the

following:
(i)

employer contributions;

(ii)

employee contributions;

(iii)

investment income such as interest and dividends;

(iv)

other income;

(v)

benefits paid or payable (analysed, for example, as retirement, death

and disability benefits, and lump sum payments);

(vi)

administrative expenses;

(vii) other expenses;

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(viii) taxes on income;

36

(ix)

profits and losses on disposal of investments and changes in value of

investments; and

(x)

transfers from and to other plans;

(c)

a description of the funding policy;

(d)

for defined benefit plans, the actuarial present value of promised

retirement benefits (which may distinguish between vested benefits and
non-vested benefits) based on the benefits promised under the terms of the
plan, on service rendered to date and using either current salary levels or
projected salary levels; this information may be included in an
accompanying actuarial report to be read in conjunction with the related
financial statements; and

(e)

for defined benefit plans, a description of the significant actuarial

assumptions made and the method used to calculate the actuarial present
value of promised retirement benefits.

The report of a retirement benefit plan contains a description of the plan, either
as part of the financial statements or in a separate report. It may contain the
following:
(a)

the names of the employers and the employee groups covered;

(b)

the number of participants receiving benefits and the number of other

participants, classified as appropriate;

(c)

the type of plandefined contribution or defined benefit;

(d)

a note as to whether participants contribute to the plan;

(e)

a description of the retirement benefits promised to participants;

(f)

a description of any plan termination terms; and

(g)

changes in items (a) to (f) during the period covered by the report.

It is not uncommon to refer to other documents that are readily available to users and in
which the plan is described, and to include only information on subsequent changes.

Effective date
37

This Standard becomes operative for financial statements of retirement benefit

plans covering periods beginning on or after 1 January 1988.

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